Economics: US central bank set to hike interest rates again today

The Federal Reserve will likely raise its target interest rate to above the rate of inflation for the first time in a decade today, igniting a new debate: when to stop. The Fed has been gradually hiking rates since late 2015 with little sign of tighter conditions hampering economic recovery. The expected June increase will raise the stakes as the Fed seeks to sustain the second-longest US expansion on record while continuing to edge rates higher.

With inflation still tame, policymakers are aiming for a “neutral” rate that neither slows nor speeds economic growth. But estimates of “neutral” are imprecise, and as interest rates top inflation and enter positive “real” territory, the Fed is at higher risk of going too far and actually crimping the recovery.

The last time rates moved into positive real territory on a sustained basis was the Spring of 2005 when the Fed began tightening rapidly after a period of arguably too-lax monetary policy, ending just months before the start of the 2007-2009 financial crisis.

After today’s expected increase, the Fed’s target interest rate will be set at a range of between 1.75% and 2.00%, matching the Fed’s inflation target and roughly in-line with the latest inflation data. That translates to a real rate of roughly zero and is already at “neutral”, according to some policymakers who feel the Fed should stop hiking now.

Along with a policy statement, the June 12-13 Federal Open Market Committee meeting is due to be followed by a news conference from Fed Chair Jerome Powell. Updated economic projections will show whether policymakers still anticipate one additional rate-hike in 2018, following June’s, or if they now envision two increases. Longer-run forecasts and possible changes to the language of the FOMC statement will shed light on the Fed’s new phase.

For much of the recovery from the financial crisis and recession, the statement has been used to reassure the public and investors that rates would remain “accommodative” and bolster chances of encouraging above-trend growth. But with rates closer to a “neutral”, non-accommodative level, the communication challenge for the Fed is to flag the approach of a “neutral” rate of interest without signalling plans to make policy restrictive.

Policymakers’ long-run estimates of the real “neutral” rate of interest vary from 0% to 1.5%. The median estimate of the long-run neutral rate is 0.9%, basically room for four more rate-increases after June before policy risks becoming restrictive.

Although a core of Fed officials feel rates on a shorter-term basis may have to move slightly higher than that sometime in 2020 to keep inflation in check, only two see real rates above 2% in the foreseeable future.

In our view, the Fed doesn’t need to worry about rates nearing “neutral” as long as jobs numbers stay strong and inflation remains near target.

Economics: Irish residential property prices forecast to show another double-digit year-on-year increase for April

The domestic economic focus on Wednesday turns to the residential property price index for April. In the year to March, residential property prices (houses and apartments combined) at a national level rose by 12.7%, up from the revised annual increase of 12.5% (13.0%) posted in February.

In Dublin, residential property prices rose by 12.1% in the year to March. Dublin house prices increased 11.8% whereas apartments rose 13.9% in the same period. The highest house price growth in March was in Dublin City, at 14.2%. In contrast, the lowest growth was in South Dublin, with house prices rising 9.6%, though still a significant amount.

Residential property prices in the Rest of Ireland (i.e. excluding Dublin) were 13.4% higher in the year to March. House prices in the Rest of Ireland rose 13.0% over the period. The West region showed the greatest price growth, with house prices increasing 18.0%. Conversely, the Border region showed the least price growth, with house prices rising 8.8%. Apartment prices in the Rest of Ireland increased 13.4% in the same period.

As we’ve said on numerous occasions recently, prices are only going one way in the short-term until the supply issue is resolved. There are shades of the “Celtic Tiger” era regarding the property market at the moment, and we all know how that ended. We see house price growth staying in positive territory on a year-on-year basis for the foreseeable future, with the annual rate of increase now looking like it’s set to remain in double-digits for well into 2018 at least. The biggest rise this year is likely to come from outside the capital, with the asking price for houses in more expensive areas rising at a slower annual rate.

An annual increase in residential property prices of 12.5% is forecast for April.

Alan McQuaid (13/6/18)
Economist